UK: The Importance Of Clear Allocation Of Contractual Risks And Liabilities

The UK offshore wind energy sector has come a long way since the
first offshore wind farm was completed in 2000 at Blyth Harbour in
the northeast of England, with just two turbines totalling 4MW.
Installation has grown almost exponentially since – a level
of growth that is essential if the UK is to achieve its ambitious
renewables targets for 2020 and beyond. But the principal challenge
for offshore wind is the UK government's edict that it must
reduce the cost of electricity from around £140/MWh today to
£100/MWh by 2020. A critical element of this is to address
the contractual interface between owners/ developers and
contractors early in the project lifecycle, so that risk and
responsibility can be considered in detail and allocated.

Contracting strategy

When deciding which contracting strategy to use for the
construction of an offshore wind farm, a project owner has a number
of options. These include: an engineering, procurement &
construction (EPC) contract; multi-contracting; and alliancing
contracting.

In the context of offshore wind, each of the above options has
advantages and disadvantages. An EPC contract, for
example, may appear attractive to a project owner since its fixed
price and relatively low risk makes it easier to finance. However,
presently there are few offshore wind EPC contractors who are able
and willing to take on the high level of risk involved –
adverse weather and subsea conditions being just two of the perils.
This can mean limited options and a high price tag for a project
owner wishing to use this model.

Multi-contracting allows the project owner a greater
variety of contractors to choose from for each scope of work.
Liability can be apportioned between the owner and the contractors
on a case-by-case basis, depending on each contractor's
appetite for risk – often dependent on its insurance
arrangements. The up-front price for the project owner can be lower
in a multi-contracting scenario, but downsides are likely to
include retention of adverse weather risk and geotechnical risks.
The owner is also often left to manage the interface between all
the contractors, which can be a project in itself.

Alliancing contracting is a relatively new and untested
model in offshore wind. Under this strategy, which was recommended
by the UK Offshore Wind Cost Reduction Task Force (CRTF) in the
June 2012 report, the aims of all the parties are, in theory at
least, aligned. Its main advantage is that all members of the
alliance share in the overall gain if the project is completed
within budget, which creates an incentive for them to complete
their element of the work on time and without wasted expenditure.
The flipside is that each alliance member must be prepared to share
in the pain if the project is delayed by the failure of another
member or by external forces beyond the control of any of the
parties. These are often difficult to negotiate and define in the
contract.

Because a high degree of trust and transparency is required,
this model necessitates experienced and financially robust
contractors, which could be an automatic barrier to entry for
smaller contractors that the industry is otherwise seeking to
encourage. It is too early to say how effective and successful this
model will be, but experience in offshore oil and gas is mixed, and
contractors often find it does not benefit them.

Which contract form?

The prevalent contracting strategy in the UK offshore wind
sector to date has been multi-contracting. When considering the
appropriate contract form for such a scenario, a number of options
are available to the parties, including:

a standard form contract with amendments; and

a bespoke contract, usually produced by the owner.

Although the use of a standard form contract might appear a
time-and cost-effective choice, there is a danger that it will
simply not be fit for purpose. For example, the use of a standard
form contract drafted for use in the oil and gas construction
industry, such as LOGIC, or even for the onshore construction
industry, such as FIDIC, is rarely the best starting point for the
negotiation of an offshore wind contract. Substantial negotiation,
amendment and lengthy additional clauses are needed to adapt it to
a particular project.

There are no standard forms designed specifically for offshore
wind yet, but moves are afoot to develop suitable forms.A key
recommendation of the CRTF report was the establishment of a common
knowledge forum of senior industry practitioners to identify best
practice and models.

International non-governmental organisation BIMCO, which
provides regulatory, information and education services to the
shipping industry, is developing a "WINDTIME" contract
for smaller crew maintenance and support transfer vessels, due to
be published in 2013. However, it is early days, and experience
shows that development and acceptance by an industry of such
standard forms takes some years.

In the meantime, utility companies and contractors will have to
continue negotiating their own bespoke wordings or other standard
forms. They will have to ensure that all risk and liability
provisions are included in sufficient detail, and that the
respective obligations of the parties are clearly and thoroughly
expressed.

What works for one project will not necessarily work for
another, and the advantages and disadvantages of each contracting
strategy should be considered on a case-by-case basis. As for
choice of contract form, parties need to think carefully about
whether standard form contracts can be adapted to the needs of the
project. Experience to date shows that if risks and liabilities are
identified early on, clearly defined and allocated to the party
best placed to bear them, costs will be reduced for all involved,
to the benefit of the wider industry.

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